Five dozen financial “experts” tracked by CXO Advisory Group LLC of Manassas, Va., over the past two years were right only about 48% of the time incalling the broad direction of the U.S. stock market.
Mad Money’s Jim Cramer saw the future with 47% accuracy, while bond king Bill Gross’s public forecasts were on the money only 46% of the time. If the gurus tracked by CXO were taking a fortune-telling class, they would flunk out of soothsaying school. But their unimpressive showing demonstrates an important truth: The stock market stumps even the best minds.
Even the patterns that do emerge usually sucker us all. Consider emerging markets. Stock markets in developing countries handily outperformed those in the developed world from 1988 to 2009. So does that mean you should jump into emerging markets now? Slight alterations of starting and ending points can radically alter your conclusions.
As mentioned above, emerging markets outperformed developed markets from 1988 to 2009 – but they lagged behind from 1985 to 2006. It’s small wonder that most people don’t spend much time mulling these baffling patterns. Unfortunately, they do something even more dangerous: They simply jump on board whatever is hot or sell whatever is cold.
During the 1990s, anyone who mentioned dividend paying stocks was laughed at, derided as a relic and left in the dust by the fast growth investors who were loading up on the hot dot.com stocks. This trend lasted for ten years and many called even people like Warren Buffett an old fuddy-duddy.
Today, with dividend-paying stocks all the rage, many investors are doing the opposite. They’re abandoning growth stocks and stocking their portfolios full of utilities, consumer staples companies and other “can’t miss” propositions. They may be right, but we strongly suspect that dividend-paying stocks will, at some point, lag the market for years, simply because they’ve been bid up so high. When that happens, many recent converts to the style will abandon it. That’s a pity, but it’s a predictable – and costly – reality of human behaviour.
The Chicago-based research firm Dalbar found that the average investor has underperformed the market, each and every year, since it began compiling data in 1990. The S&P 500 index returned an average 9.14 per cent over thepast 20 years, while the average investor earned only 3.83 per cent.
We all wish we knew what would be the biggest winners of tomorrow. We don’t and neither does anyone else. So we suggest to always invest in a diversified portfolio and rebalance annually and forget about trying to outsmart an unpredictable market. If you’re diversified enough, you will own both developed-world and emerging market stocks and more. You won’t have to guess the decade’s next great strategy. Best of all, you can spend your time playing with your kids or grandkids instead of asking questions about the direction of the markets.
But… forecasting has become like a sport (we want winners and losers). We tracked down one forecast that got 2012 mostly right (a winner). But…we caution you to place your future bets carefully…
— Adrian Reynolds is a 20 year vetran of the financial services industry; currently with DeThomas Financial Corp